The global financial crisis is far from over, according to analysis by a major Wall Street bank, as European markets continue to decline.
Analysts at JP Morgan have highlighted concerns about “carry trades”, which are believed to be a key factor in the recent market turmoi.
Indeed, the total market capitalization (the combined value of all listed companies) of the FTSE 100 index plunged by a huge £40 billion on Monday.
Carry trades involve borrowing money at low interest rates in one currency and investing it in assets denominated in another currency to achieve higher returns.
Recently, traders have been borrowing Japanese yen for this purpose.
However, following the Bank of Japan’s decision to raise interest rates for only the second time in 17 years last week, traders have started unwinding these trades.
As a result, there has been a scramble to sell higher-risk, dollar-denominated assets to manage the increased borrowing costs, losses from exchange rate fluctuations, and falling asset values as share prices dropped.
Hedge funds that engage in carry trades use computer models to optimize returns while managing risks.
These models have triggered the sale of shares to maintain acceptable risk levels.
Arindam Sandilya, co-head of global FX strategy at JP Morgan, told Bloomberg TV: “We are not done by any stretch.
“The carry trade unwind, at least within the speculative investing community, is somewhere between 50 to 60 percent complete.”
